Norway financial services

Norway proposes change in wealth fund's asset allocation

February 28th 2017 | Norway | Asset management

Event

On February 16th Siv Jensen, the minister of finance, announced plans to change the asset composition of the Government Pension Fund Global (GPFG), increasing the share of equities from 60% to 70%. This will alter fiscal policy guidelines via the revised real return rate, determining how much of the GPFG assets are to be spent each year in the national budget.

Analysis

The government is to submit to parliament on March 31st a proposal to increase the share of equities in which the fund invests from 60% to 70%. This decision was taken based on broader public support and on a high degree of the fund's risk-bearing capacity compared with 2007—the last time that an investment assessment was carried out. The proposal will translate into a proportional reduction in bonds and/or property assets.

The change will affect the real return on the fund's assets, which will fall from 4% currently to 3%—an estimation based on a real return on bonds of between 0.5 and 1 percent and an equity premium of 3 percentage points. It is important to stress that these are long-term estimates and are likely to be higher or lower in each year. Real interest rates have been declining over the past decade, and the government believes that the low-interest-rate environment is likely to remain, reflecting structural changes in the world economy.

Consequently, this will alter the "Action Rule", the fiscal rule that matches spending to the expected annual real return on the fund's assets, thereby preserving the capital in the fund for future generations when oil and gas reserves will become depleted. Broader public support for this change stems from the fact that the 4% target is rarely met, with one exception over a decade. In addition, in the national budgets for 2014-17 outlined by the present coalition the maximum amount of oil wealth used to fund spending was 3% (or less).

Impact on the forecast

We expect the proposal to be approved by parliament and that this should not alter the size of the government's fiscal stimulus in the economy. It might slightly increase pressure on monetary policy, but we expect Norges Bank (the central bank) to keep its main policy rate on hold at 0.5% in 2017 and for some time after.